Extending Your Lease in 2023

Darren Bagnall of Flat Living Insurance looks at the pros and cons of extending your lease in 2023.

2023 is a tricky but hopeful year for leaseholders. The Leasehold Reform (Ground Rent) Act came into force last year, a welcome change that is helping thousands of new leaseholders to enter the market while avoiding the expense of Ground Rent. The Secretary of State for Levelling Up, Housing and Communities, Michael Gove has recently been hinting at further reforms that could change the leasehold landscape enormously… we just don’t know when or exactly how.

For those on older leases, unaffected by the Leasehold Reform (Ground Rent) Act 2022, and who are looking to extend their leases this year, the vague nature of the proposals is surely frustrating. Tough decisions will need to be made around whether to go ahead and extend as per the current system, or to hold out for when the proposals become clearer.

Here we’ll be discussing what a lease extension entails, how the Mr Gove’s proposals may affect the sector and providing some guidance for those on the cusp of extending this year.

Why Are Lease Extensions Necessary?

When you buy a leasehold property, you’re effectively buying the right to live there for the period of the lease. The land it’s built on is owned by the freeholder. When they’re first built, flats tend to have a lease of 99 or 125 years. Without a lease extension, when that time is up, the flat automatically returns to the possession of the freeholder.

In reality, leaseholders extend their leases to maintain their ownership and the value of the property. When they do so, a premium is paid to the freeholder to compensate them for the added length of time before they obtain possession of the property and for the lack of ground rent receivable moving forward.

Leases should ideally be extended before they reach 80 years or less, for two reasons:

• They get more expensive as time goes on but especially so when they fall to less than 80 years.
• It’s very difficult to get a mortgage or to re-mortgage a property when there’s less than 70 years on the lease.

Extending before you hit the 80-year benchmark should save you some money and ensure that your property is still desirable to buyers if you’re looking to sell.

How is a Lease Currently Extended?

Under the current system, leaseholders have two options: a formal and an informal route.

Under the formal route, leaseholders must meet certain criteria before the lease extension can be negotiated with their freeholder:

• They must have been registered as the property owner with the Land Registry for at least 2 years (the registration date is usually a few days to a few months after you complete).
• The property can’t have been originally bought through shared ownership unless you’ve increased your share to 100%

Note: If you add another person to the title deeds, the two year clock re-sets. You don’t have to have lived in the property for 2 years, you just need to have owned it as per the Land Registry registration.

Both parties must follow a specified procedure as well as strict timescales set out in law, and leaseholders enjoy much more protection via this route as they can take their case to the Tribunal if the terms or price can’t be agreed.

The informal route involves a private agreement between the leaseholder and the freeholder, with terms and price to be negotiated among themselves. Freeholders are under no obligation to agree to a lease extension in this instance.

Word of warning: Informal lease extensions are negotiated between the leaseholder and freeholder, meaning that unscrupulous freeholders won’t necessarily add 90 years to your lease or reduce your ground rent to zero, making the property difficult to sell in the future.

It’s often recommended that the informal route is attempted at first as it can be far cheaper for leaseholders if their freeholder is agreeable. The formal route can then be taken if needs be (and if the lease meets the legal criteria).

Step by Step Guide to Extending Your Lease

The Leasehold Advisory Service states that “Lease extension can be a difficult process. We recommend you get professional help from a solicitor and surveyor with experience in this area.” Based on that advice, you can follow the following steps:

• Choose Your Solicitor

If you don’t have a recommendation or anywhere to start in your search, head to the Association of Leasehold Enfranchisement Practitioners website where you’ll find listing for specialist solicitors. Some companies can manage the entire process while some will ask you to find a separate valuer. Do your homework and shop around as costs vary widely (although it’s worth remembering that the cheapest option may cost you more if they allow the freeholder to drag their feet).

• Valuation of the lease

This should not be scrimped on as the valuer will give you an accurate indication of what you should pay for your extension while building up evidence that will be used to negotiate with the freeholder. These valuations are usually done remotely. Again, the Association of Leasehold Enfranchisement Practitioners website is a good place to start your search.

• Negotiation

A formal notice is served, detailing your opening offer. The freeholder will then require a deposit of 10% of the opening offer or £250, whichever is greater. They will then hopefully accept your offer. If not, they’ll provide a counter offer and your solicitor will pass that to your valuer for negotiation with the freeholder.

• Non-Agreement Next Steps

If your valuer and the freeholder can’t agree a price, you can take your case to the First-Tier Tribunal. This will increase your costs, but it will also increase your freeholders costs so hopefully they’ll negotiate to avoid this.

If things get this far (which is rare), your valuer will ague your case for you and then you’ll receive a letter from the Tribunal stating the price that you will pay for your extension.

How Much Does All This Cost?

The cost varies very widely but some estimations are below:

• Lease Extension Premium: £7,000 – £10,000
• Surveyor’s Valuation: £600 – £900
• Solicitor’s Fees: £600 – £1,200
• Freeholder’s Valuation: £600 – £900
• Freeholder Solicitor’s Fees: £600 – £1,200
• Surveyor’s Negotiation Costs: £150 – £200 per hour
• Land Registry Fees: £20 – £40

Total: Around £9570 to £14,440

The above figures are based on estimations from April 2023 but the cost of extending your lease is affected by the current value of your property (so extending when house prices are falling can be a great option). You can use The Leasehold Advisory Service’s calculator for a rough estimation for your flat.

Not many of us have £10k – £15k in our back pocket, so most leaseholders will cover these costs by borrowing more on their mortgage. Extending your lease does add a lot of value to your property, but don’t be tempted to take out loans or max out credit cards to do it. Always speak to your mortgage provider in the first instance.

What Are the Proposed Changes?

While nothing has been confirmed and no details have been provided, based on what we know so far:

• All leaseholders who can extend their lease will have the right to add 990 years.

This is a huge change, especially for leaseholders of houses who can currently only extend once by 50 years. Leaseholders of flats can currently extend as many times as they want to/can afford, but only by 90 years.

• Marriage Value will be abolished.

You can read more details on this on the Leasehold Advisory Service website, but in a nutshell, this is a payment currently paid by leaseholders to their freeholders once a lease extension is completed on a lease that was for less than 80 years.

This cost is incurred because the lease extension adds significant value to the property, and the property is owned partly by the leaseholder and partly by the freeholder. This payment to the freeholder can add thousands of pounds to the cost of a lease extension.

With no published timetable for these changes to take effect, leaseholders are in a tricky situation. As the bill is still in the consultation stage, it may even take years for these changes to become law- so that leaves many leaseholders asking “do I extend now, or do I wait?”

The answer will depend entirely on your situation, including how long is left on your lease and if you’re looking to re-mortgage or sell your property in the near future. Keep that magic number of 80 years in mind- if your lease has less 80-82 years left on it, the chances are you’d be best placed to go ahead and extend. If you have more than 80 years remaining and you’re not looking to re-mortgage or sell, you may be best off waiting to see if the changes come into effect in time for your next extension.

For advice for your particular situation, you can book a call or request a written response from the Leasehold Advisory service here.

Flat Living Insurance provides specialist insurance policies for blocks of flats and apartments. For more information or a quote, please contact a member of the Flat Living Insurance team on 0333 577 2044.